ETF data and analytics provider TrackInsight has released the results of its latest annual survey of the ETF industry, the TrackInsight Global ETF Survey 2021.
Jean-René Giraud, CEO of TrackInsight.
Jean-René Giraud, CEO of TrackInsight, said: “The results of this year’s survey reveal a maturing industry which is rapidly adapting to new types of products, new types of investors, and new digital ways of operating.
“There are many lessons to be learned from the Covid crisis, but perhaps the most enduring of which is that resilience and adaptability is the essence of survival, and the world’s largest and most sophisticated investors have been quick to embrace many new ideas that are now available as ETFs.”
For the survey, which was supported by IHS Markit and JP Morgan Asset Management, TrackInsight polled 373 professional investors globally, including some of the world’s largest asset managers, financial advisors, private banks, family offices, and institutions. Those surveyed collectively oversee $347 billion in ETF assets, representing approximately 5% of the global ETF market.
Combined with industry data from IHS Markit, including asset levels, net inflows, and product launches, the research identifies trends affecting the ETF industry and sheds light on the needs and concerns of ETF investors globally.
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“With the current tailwinds and seemingly unstoppable rise of ETFs, the industry is on track to near the $10 trillion assets under management milestone this year.”
– Jean-René Giraud, CEO of TrackInsight.
[/pullquote]Unstoppable growth
According to TrackInsight, ETFs faced an acid test in 2020 – and passed with flying colours. Despite the Covid-19 pandemic and ensuing global economic slowdown, the ETF industry continued its seemingly unstoppable growth trajectory.
Global ETF assets surged from $6.1 trillion to $7.6 trillion over the course of the year, while the number of ETFs worldwide increased by 335 to reach 6,642. Last year also saw a record number of new industry entrants with 34 issuers launching their first ETFs in 2020.
The survey revealed that ETFs are playing a larger role in professional portfolios – the proportion of investors with more than 40% allocated to ETFs nearly doubled from 36% to 67% over the year. Furthermore, only 13% of respondents invested less than 10% of their portfolio in ETFs, down from 30% in the previous year.
As has been noted in several other studies, the ETF industry’s growth is supported by its ability to steal market share from other investment vehicles. The survey found that 57% of investors have transitioned assets from active mutual funds to ETFs (up from 39% in the previous year).
When asked their rationale for using ETFs, respondents stated low costs (cited by 84% of ETF users), diversification (77%), and liquidity (68%) as the main factors driving adoption. In contrast, tax benefits were mentioned by just 16% of investors, although roughly half of US respondents cited it as a benefit compared to less than 10% of European respondents. According to TrackInsight, this discrepancy reflects the variety of regulations in Europe that are not always favourable to ETFs from a tax standpoint.
The survey also revealed a significant and growing interest in actively managed, thematic, and ESG (Environmental, Social, and Governance)-focused ETFs.
Giraud, said: “Active strategies, thematics, and new assets like SPACs and cryptocurrencies have helped redefine what ETFs are and are also paving the way for future growth. With the current tailwinds and seemingly unstoppable rise of ETFs, the industry is on track to near the $10 trillion assets under management milestone this year.”
Olivier Paquier, Head of ETF Distribution in EMEA at JP Morgan Asset Management, said: “When you pair TrackInsight’s survey results with what we’ve seen in terms of flows into ETFs over the past year, it’s clear that investors’ understanding of the role of ETFs in portfolios continues to deepen; this includes many investors diversifying their exposure beyond traditional ETFs.”
Active ETFs
With $273 billion in assets and over 1,000 funds, actively managed ETFs represent a smaller but significant part of the global ETF industry. The segment is accelerating, however, with 209 product launches in 2020 and net inflows of $80bn (approximately 11% of total ETF flows globally). Most actively managed ETFs are still listed in North America which accounts for 88% of assets and 95% of flows.
Until now, the segment has remained a marginal allocation in most investors’ portfolios. Last year marked a notable change, however, as the proportion of investors allocating to actively managed ETFs rose from less than a third (31%) to more than half (54%). Additionally, the proportion of investors with more than 20% of their portfolio dedicated to active ETFs more than tripled from 4% to 14% – representing almost one in six investors.
The most-cited potential benefits of active ETFs include excess return (noted by 64% of active ETF investors), diversification (46%), and, interestingly, lower management fees (42%) which likely reflects the high proportion of professional investors switching from active mutual funds to active ETFs.
When asking those who were not invested in active ETFs what is keeping them from doing so, 60% quoted the limited range of products available with European investors especially disappointed in the current line-up. Track record was the second biggest concern, cited by 57%, reflecting the fact that more than half of existing active ETFs have only been launched in the last three years.
Thematic ETFs
Thematic ETFs began to go mainstream last year with 30% of survey respondents indicating they had more than 20% of their portfolio in these funds, up from just 5% in the prior year. Of this group, a striking 17% of respondents had over 40% invested in thematic ETFs.
The segment looks poised for further growth with 52% of thematic ETF investors indicating they plan to grow their allocation by at least 5% over the next three years of which 13% predict boosting their allocation by at least 20%. In contrast, just 5% of thematic ETF investors expect to reduce their allocation by at least 5% over the same period.
Even though at least one study suggests that thematic strategies tend to underperform the broader market after their launch, two-thirds (66%) of thematic ETF investors quoted making strategic long-term bets as one of the main reasons behind their investment, while over half (56%) stated their investment reflects their high conviction about a specific trend.
The most popular investment themes with respondents included technology & innovation (cited by 84% of respondents), environment & climate change (69%), and the global economy & shift in geo-political power (44%).
The survey found that investors were tending to take a different approach when selecting thematic ETFs compared to broad market funds. In particular, investors ascribed greater importance to a strategy’s risk-return profile and an index’s construction methodology, although fund liquidity also remains a high priority.
ESG ETFs
Responsible investing has been one of the stand-out success stories in ETFs with assets nearly tripling in 2020 to reach $174.5bn at the end of the year.
ESG ETFs represented a notably higher share of investors’ portfolios with 27% of respondents investing more than 10% in these products. One in ten investors were allocating more than 40% of their portfolios to ESG ETFs, up from 3% in the previous year.
By far the strongest motivation for investing in ESG ETFs was to align investments with personal convictions and participate in social good (cited by 84% of ESG ETF investors). Performance came in a distant second at 41% while 39% believed the funds are effective at avoiding certain long-term risks.
Despite growing interest in sustainable investing, half (50%) of respondents indicated that they still don’t have any allocation to ESG ETFs, highlighting the potential for further growth According to these investors, the lack of consistency across ESG strategies, analysis, and ratings is the biggest challenge facing the segment (cited by 70%) as it makes it difficult to screen and compare sustainable funds. Commenting on selecting individual ESG ETFs, a vast majority (84%) agreed that ETF issuers should communicate more on their voting/stewardship policy.